Fed Gone Mad: Total Supermoney Through Second Quarter of 2011 Could Be as Much as $900 Billion

There are a few important points that must be emphasised about QE2. First, this is supermoney the Fed will be putting into the system. At the M2 money supply level it could easily be twice the QE2 amount of $600 billion. Further, the Fed is going to continue to reinvest principal payments from agency debt and agency mortgage-backed securities into longer-term Treasury securities.

Here’s the Fed Bank of New York on that amount:

The FOMC also directed the Desk to continue to reinvest principal payments from agency debt and agency mortgage-backed securities into longer-term Treasury securities. Based on current estimates, the Desk expects to reinvest $250 billion to $300 billion over the same period, though the realized amount of reinvestment will depend on the evolution of actual principal payments.

Taken together, the Desk anticipates conducting $850 billion to $900 billion of purchases of longer-term Treasury securities through the end of the second quarter. This would result in an average purchase pace of roughly $110 billion per month, representing about $75 billion per month associated with additional purchases and roughly $35 billion per month associated with reinvestment purchases.